Pattern Recognition - Too Late?

Stocks ended a good week on a sour note Friday as the major indices and TSP stock funds were down about 1% across the board on the day, while the F-fund picked up 0.16%.

For the week, the TSP stock funds all closed higher and for October, they are still up between 2% and 3%.

For several months now, the S&P 500 has been in a pattern of riding resistance for days to weeks at a time, then experiencing a sharp decline, followed by a move back to resistance. If this continues we should have a few to several more days riding the rising resistance, then we'd be set up for a quick, minor pullback.

But what I have noticed over the years, is that as soon as you recognize a pattern strong enough to consider "playing", it tends to end ruining the advantage you thought you might have. Will the pattern continue or will it end because it has now become obvious? I'm talking about the short-term trends here. We know that the longer-term trend is firmly higher, and that could take a while to break.

The MACD is still showing an ongoing negative divergence, but this has done little to help over the last several months. The market has continued higher despite the lower MACD readings.

The NYSE overbought/oversold indicator (OB/OS) has turned down rather quickly after the new high on Thursday, and the market did not get as overbought during this last leg higher. Whether this tells us if the market is losing strength remains to be seen, but I would suspect that we could see the -500 area (OS) before it gets much more overbought. lately however, once it has made the turn down, it seems to want to get oversold before heading back up.

We talked last week about the sentiment surveys starting to become overly bullish, but not quite being at extreme levels yet. Taking a look at the put/call ratios, also an indication of investor sentiment, we are seeing some extreme readings.

The top two put/call ratios below, the CBOE and the Equity, are considered "dumb money" options traders and they are both at or near multi-year highs (overly bullish). Normally you would see the "smart money" - shown as the OEX put/call ratio below - moving in the opposite direction of the dumb money, and while they are much less bullish than the dumb money, they are moving in a bullish direction.

The direction of the smart money (OEX) is interesting in that, while it is moving up, it normally only does so when the market is heading down. They, the smart money, tend to buy call options as prices fall so that they are positioned in a very bullish allocation when the market bottoms - The opposite of what the dumb money is doing. The dumb money tends to be the most bullish at market tops.

The OEX put/call ratio normally moves up (on the chart, lower in number) when the market is moving down, but we just had a new high on the S&P 500 last week, so that is why this recent move up is an interesting one.

Have you noticed the price of oil? It is perking up again and is now at a new 52-week high moving closer to $80 a barrel. It is getting close to winter and the dollar continues to fall, so this could be at least an intermediate-term trend. You have to wonder what an $80 to $100 a barrel price of oil would do to our improving, but still shaky, economy.

Last week's TSP Talk Sentiment Survey came it at 54% bullish, 32% bearish for a bulls to bears ratio of 1.69 to 1. That is still a neutral reading for our bull market criteria and it keeps the system on a buy signal for this week.

Last week was an options expiration week and the market lived up to its expiration bias, which is stronger than a random week. Post-options expiration week has a negative bias so let's see if the bulls can keep the rally going or if stocks need another breather.

That's all for today. Thanks for reading! We hope to see on TSP Talk.com.